The bogus benefits of PPPs

July 14th, 2009

Occasionally, someone in business lets the cat out of the bag in a way that is impossible to satirise. Thus in the NZ Herald this morning, we find Deloittes corporate finance partner Paul Callow telling us that foreign investors are now looking at New Zealand quite differently since the change in government. Why, the climate for Deloittes clients has totally changed! “It is now a far more receptive and certain environment. Labour provided a lot of mixed messages.”

No, we can’t have ‘mixed’ messages. They’re SO confusing. Surely, the interests of business are the sole factor for government to consider. Not surprisingly, the story in question is a hymn to the virtues of public private partnerships [PPPs], and their alleged superiority to government investment. As if it was 1984 all over again, we are told that everyone overseas is doing it. “There are models from all round the world of successful PPPs…PPPs bring much-needed commercial discipline to government expenditure,” Callow says.

Surely, this has to be a joke? In the wake of the global failure of private sector capitalism, of private sector ‘commercial discipline’ running Air New Zealand into bankruptcy and the cost over-runs and boondoggles involved with PPP transport projects in Australia and Britain – all faithfully recorded in various OECD reports – are we still trying to claim that private industry is intrinsically more efficient than government? What planet have these people been living on for the past decade?

Oh, transport. We’re back in fairyland again. “I can’t understand why we continue to invest heavily in rail and particularly passenger rail. In our country it will always be an incredibly expensive form of transport which relatively few people in Auckland will be able to access,” a supermarket chain boss says. Yep, those supermarket chain bosses have always been the go-to experts on the future needs of our national passenger transport system.

Memo to Supermarket Guy : it is quite expensive to build billion dollar motorway projects too. and these are far more heavily subsidized by the taxpayer than passenger rail. The reason why governments are investing in passenger rail is because in the 1990s the private sector asset bought those assets at fire sales prices and asset stripped them to the bone. Oh, and rail is more cost efficient and environmentally friendly than road transport. And people in Auckland have been using public transport in record numbers. Etc etc.

Question: if best practice elsewhere is supposed to be taken as a validating argument…how come so many large cities overseas have seen the wisdom of investing heavily in light rail, and have NOT poured so many of their eggs into motorways as the sole or over-riding transport solution ? Why – for decades – has Auckland and central government neglected to invest in rail, and needed to be dragged kicking and screaming into the 21st century on this issue?

Here’s John Barnett of South Pacific Pictures (another expert apparently, on national transport infrastructure spending): “It just takes too long to get around and clearly that leads to enormous inefficiencies in all sorts of things.” And the answer therefore is… what? More money for self defeating and expensive PPP roading projects – or for building a better urban transport system in Auckland to get many of those cars off the road ?

On one point alone, it is possible to agree that the real weakness lies with government. A recurring problem with PPPs overseas has been the inability of central government to stop the private sector from rorting the tax payer. In Victoria for instance, state governments proved incompetent at every stage of the contract process. They invited ‘beauty contest’ tendering – where unrealistically low bids won the contracts, allowing politicians to brag about cost savings. Then these same state politicians proved incapable of ensuring the contractors were held to account for subsequent cost ‘over-runs’ and extortionate lease conditions and debt financing that ended up pushing overall costs through the roof.

Politicians in such situations then have an incentive to bail out failing projects, and/or to hide the damaging evidence under the blanket of the alleged ‘commercial sensitivities’ involved. As the Melbourne Ageconcluded last year:

Outsourcing public transport is only as good as the contract on which it is based. The OECD report on competitive tendering of rail services in 2008 gave a damming indictment on franchising or PPPs as a method of managing public transport based on its evaluation of the experience in Melbourne and London.

The report suggested that public transport is managed more efficiently through operating contracts where the strategic management and responsibility of the system remains explicitly with the authorities.

According to the OECD, one way of dealing with the problem is to “incorporate increasing prescription of the franchises, which undermines the ability of the franchisees for innovation and transfer of risk to the operator, which are the main benefits advanced for the system.

“Thus, as franchising evolved, it has come to lose its distinguishing characteristics — the alternatives which made it superior to alternative forms of provision. In this circumstance, the main alternatives to franchising are, obviously, the retention of public sector production or undertaking operating contracts (where only the cost risk is transferred).”

The OECD report judged the franchising/PPP arrangements in Britain and Australia to be a failure because, among other things, both governments “completely underestimated skills required to design, implement and monitor such franchising systems”.

In other words, if you monitor a PPP contract properly, its alleged cost savings tend to vanish. Ultimately, it is not beyond Treasury to devise and enforce contracts that really do deliver the savings that PPP projects flirtatiously promise, and so rarely deliver. But then, if the government did that job properly all the way down the line on such contracts, wouldn’t it risk being seen by business as sending out the same ’ mixed messages’ so detested by the man from Deloittes ? Can’t have that.

Frankly, if the name of the PPP game is to subsidise business for building a motorway why don’t we scrap all this nonsense about efficiencies and call PPPs what they usually are – a taxpayer handout to the private sector?